Forex. Trading on the basis of COT reports
As practice shows, only losses can be absolutely stable in the Forex market. If you want to trade profitably in the long run, you need to learn how to make timely adjustments to your trading strategy, including the use of those tools and methods of analysis that give a positive result at this particular stage of market development. The peculiarity of all the methods of analysis that are not becoming obsolete is that they are usually of little use when used in isolation, and are good only in conjunction with more advanced forecasting methods. There are many such methods, one of the most common in the narrow circles of experienced traders is trading on the basis of COT reports. This method is difficult to refer to technical or fundamental analysis because it is something in between. So, this article will focus on COT reports and their use in trading.
COT reports are published weekly on the website of the U.S. Commodity Futures Trading Commission (CFTC). The publication takes place on Friday after the close of the trades, the information in the report contains data for the evening of Tuesday of the published week. COT report contains information about the positions of major players on the Chicago Stock Exchange. Despite the fact that the commission is provided with information about transactions of a fairly large volume, the report also contains the aggregate positions of small speculators, and in the aggregate gives quite complete information. The total positions in the report are divided into three categories: large speculators, small speculators and hedgers. Based on the dynamics of changes in the total volume of positions of certain market players, you can make predictions about the nearest price movement.
Learn more about interesting methods of large speculators trading in the article Stop Loss Hunting by large players.
Despite the rather simple and clear information in the reports, it is not easy to make predictions based on them, which is due to several reasons. The report reflects the position of the futures market, which means that it is future-oriented, and not always the current situation corresponds to it. In addition, not all of the positions reflected in the report are aimed at speculation. For example, hedgers make transactions with a certain amount of currency not for the purpose of making a profit, but for the purpose of insuring export or import risks associated with possible future changes in currency exchange rates. Such deals do not reflect the market mood. At the same time, the positions of small speculators are often delayed, as they are mainly focused on technical analysis and short-term price movements. Thus, the positions of large speculators seem to be the most interesting, especially if they repeat the dynamics of hedgers’ positions, which, despite other trading objectives, have a significant impact on the market and price movement. However, it is important to remember that large speculators, as a rule, are guided by large long-term trends, the error with the entry point for 1-2 weeks is not critical for them.
COT report, being a stock exchange instrument, contains information on each individual currency, not on the currency pair, so to predict the dynamics of the rate, it is necessary to conduct a comparative analysis of COT reports on two currencies, based on the opposite dynamics of changes in the volume of positions. The bigger the difference in the volume of positions between the two currencies, the bigger the probable change in the exchange rate will be, but, again, it should be remembered that the clients of brokerage companies are guided by different time periods, and the report does not allow to judge exactly when the movement will occur.
COT reports are an extremely complex tool that requires a great deal of experience in trading with them for successful application. In addition, it should be used only as an additional confirmation signal of the trading strategy, and not as an independent trading strategy. The most important advantage of COT reports is that they allow you to track so-called “smart money”, which is not only better informed about the market situation, but also have a significant impact on the price due to the large trading volumes.